Fortune's Fool

Edgar Bronfman, Jr., Warner Music, and an Industry in Crisis

Fred Goodman

• Publisher: Simon & Schuster
• Year: 2010
• ISBN:
  9781439160503
• Topic: Negocios y empresa
• Subtopic: Historia empresarial

In 1999, when Napster made music available free online, the music industry found itself in a fight for its life. A decade later, the most important and misunderstood story—and the one with the greatest implications for both music lovers and media companies—is how the music industry has failed to remake itself. In Fortune's Fool, Fred Goodman, the author of The Mansion on the Hill, shows how this happened by presenting the singular history of Edgar M. Bronfman Jr., the controversial heir to Seagram's, who, after dismantling his family's empire and fortune, made a high-stakes gamble to remake both the music industry and his own reputation. Napster had successfully blown the industry off its commercial foundations because all that the old school label heads knew how to do was record and market hits. So when Bronfman took over the Warner Music Group in 2004, his challenge was to create a new kind of record executive. Goodman finds the source of the crisis in the dissolution of the old Warner Music Group, the brilliant conglomerate of Atlantic, Elektra, and Warner Bros. Records. He shows how Doug Morris, the head of Atlantic Records, rose through the ranks and rode the CD bonanza of the 1990s to enormous corporate and personal profit before becoming embroiled in an ego-driven corporate turf war, and how all of Warner's record executives were blindsided when AOL/Time-Warner announced in 2003 that it wanted nothing more to do with the record industry. When the music group was finally sold to Bronfman, it was a ghost of itself. Bronfman built an aggressive, streamlined team headed by Lyor Cohen, whose relentless ambition and discipline had helped build Def Jam Records. They instituted a series of daring initiatives intended to give customers legitimate online music choices and took market share from Warner's competitors. But despite these efforts, illegal downloads still outnumber legitimate ones 19–1. Most of the talk of a new world of music and media has proven empty; despite the success of iTunes, even wildly popular sites like YouTube and MySpace have not found a way to make money with music. Instead, Warner and the other labels are diversifying and forcing young artists to give them a cut of their income from touring, publishing, and merchandising. Meanwhile, the average downloader isn't even meeting forward-thinking musicians halfway. Each time a young band finds a following through music websites, it's a unique story; no formula has emerged. If one does, Warner is probably in a better position than anyone to exploit it. But at the end of the day, If is the one-word verdict on Bronfman's big bet.

1
Family Business, or the Tale of Two Edgars

Edgar Bronfman Jr. has always been an enigma to the music business. When he bought MCA in 1995–which he would use to build Universal Music into the world’s largest record company–people in the record industry noted that he didn’t conform to stereotype. He was neither a “killer,” the cutthroat executive who’d chewed his way through everyone ahead of him on the corporate ladder, nor a “real record man,” the romanticized and no less Machiavellian music maven with a feel for the street and the will and raw ego to transform a lifelong obsession with music into a commercial empire cut in his own image. “I’m not sure what he brings to the table,” one second-generation record executive said dismissively at the time. “He’s not book smart and he’s not street smart.”

In 1955, the year Edgar was born, his family’s liquor empire, Seagram, supplied one of every three drinks sold in the United States. His father, Edgar Sr., is the only person to have made the Forbes list of America’s five hundred wealthiest individuals every year since its inception, and his mother, Ann, is a Loeb, of the historic Wall Street investment bank Kuhn, Loeb & Company. Home for young Edgar was a duplex penthouse at 740 Park Avenue, the celebrated building where Jacqueline Onassis grew up and Time Warner founder Steve Ross owned a thirty-two-room penthouse. On the weekends, Edgar swam and played tennis at the family’s Georgian-style mansion in Purchase, New York, and played with the other wealthy Jewish children at the Century Club. Once asked what it was like to grow up a Bronfman, Edgar laughed. “It’s terrific. I thoroughly recommend it.”

Being a Bronfman hadn’t always been such a great deal. In 1888, Edgar’s great-grandfather, Yechiel, a Bessarabian miller and tobacco farmer, fled a pogrom with his family to become part of what proved an unsuccessful Jewish agrarian community in Wapella, Saskatchewan. Yechiel grubbed for work in the frontier towns dotting the western lines of the Canadian Pacific Railway. There, along with his oldest sons, Abe and Harry, he sold scrap wood in the summer and frozen whitefish in the winter.

According to family legend, the Bronfmans discovered the liquor business through the circuitous route of trading horses. It was a tradition to seal those deals with a drink–and usually the only place to do that was the bar in the small hotel that marked each railroad town. The Bronfman boys saw that dispensing drinks was a better deal than buying them and cobbled together the money for a small hotel in Emerson, Manitoba. It proved a good idea: by World War One they owned hotels in Yorkton, Saskatchewan, as well as in Port Arthur and Winnipeg, the latter managed by a younger brother, Sam, who was just twenty-two. The last son born in Russia, Sam engineered the Bronfmans’ almost inconceivable change of fortune, moving them in one generation from the shtetl to the castle. Faced with lifelong accusations that their hotels had been little more than brothels, the rapacious and unapologetic Sam would declare, “If they were, then they were the best in the West!” When Canadian prohibition hit in 1916, the Bronfmans gave the first indication that they were a business family to be reckoned with.

Their economic salvation lay buried in a loophole of Canadian law. When the country went dry, each province determined the specifics of prohibition within its borders, while the federal government retained control over sales between provinces–which remained legal. Unable to sell alcohol in their hotels, the Bronfmans moved into the mail-order liquor business and opened warehouses around the country for the sole purpose of using the federal provision to ship whisky from province to province. And when World War One rationing later banned alcohol sales for any but medicinal purposes, the Bronfmans obtained drug wholesaling licenses and sold their wares to drugstores. In the end, the brief-lived Canadian prohibition proved a boon to the Bronfmans, a tune-up for what was to come in the United States.

By the time of the Volstead Act in 1920, the Bronfmans had ware-houses–“boozoriums”–in small border towns from British Columbia to Ontario, where Americans could purchase all the liquor they wanted legally. It was a rough-and-tumble business, and a Bronfman brother-in-law managing several of the warehouses was shotgunned to death by bootleggers in 1922.

Harry, who ran the business, had a ready supply of Canadian and Scotch whisky but saw a chance for the family to do even better by making its own. The Bronfmans’ first forays into distilling were reputedly nothing more than rotgut: four parts water, one part pure grain alcohol, a few gallons of someone else’s good whisky for flavor, a touch of caramel for color, and a dash of sulfuric acid for a little kick and the illusion of age. The famous aged Scotch whiskies Glenlivet (which the Bronfmans would eventually own) and Johnnie Walker inspired the family’s fake brands–finger-numbing two-day wonders “Johnny Walker” and “Glen Levitt.” They were a howling success. And though hardly alone in the perfectly legal business of selling alcohol in Canada to Americans, they were far and away the most aggressive. They would one day agree to a settlement with Canadian and American tax authorities amounting to a de facto admission to having provided 50 percent of all whisky smuggled in from Canada.

In 1924, the Bronfmans purchased the shuttered Greenbrier Distillery near Louisville, Kentucky, tore it down, and shipped the equipment to Montreal, where they built a new distillery in Ville LaSalle on the St. Lawrence River. Two years later they started Distillers Corporation Ltd. as a partnership with the Distillers Company Ltd. of Great Britain–then the world’s largest distiller–and became the exclusive Canadian agents for many of the world’s best Scotches. In 1928, they purchased Ontario’s Joseph E. Seagram & Sons, a small distiller with a good reputation. In one of their most prescient moves, the Bronfmans held back their best and better-aged liquor and sold parched Americans such now-forgotten beverages as Chickencock (sold in a can), stockpiling their superior distillations against the day Prohibition would be repealed and consumers could afford to be more selective. More than any other, this move made the Bronfman fortune. When Prohibition ended in 1933, Seagram was sitting on 3 million gallons of aged and select whisky. Overwhelming their competitors, they bought US distillers, brands, and distributors, and by 1938 claimed to be the leading company in the US spirits market.

Throughout much of Prohibition, Sam and Harry had each held 30 percent of the company. But Harry found himself indicted on various bootlegging and related bribery charges. He eventually beat them, but the publicity–particularly regarding his flair for convincing key witnesses of the financial merits of moving beyond the reach of the courts–made him a less-than-ideal candidate to head the rapidly expanding and increasingly respectable company now known as the Distillers Corporation–Seagram’s, Ltd. As Sam made the company more and more his own, he would present his brothers and sisters with a succession of revised share plans, until he personally held 37.5 percent out of the family’s 51 percent stake in the company. At that point, he and Allan, the youngest brother and Seagram’s attorney, were the only ones retaining significant shares and input–and Sam always made sure Allan knew the score. “The business is mine,” Sam told him. “You must understand that the words ‘we’ and ‘us’ no longer apply.”

Taking over, Sam–or Mr. Sam, as he was now called by his employees and associates–concentrated on expanding the business in the United States and treating himself like a pasha. He acquired a chauffeured Rolls-Royce and moved the family to Westmount, the English-speaking suburb that most of Montreal’s affluent Jews called home. There, Sam and Allan occupied adjacent mansions at the top of Mount Royal. Sam usually spent his weeks in New York, traveling back and forth to Montreal by private sleeper car on Friday and Sunday nights. His apartment at the St. Regis Hotel–which he kept for thirty years–was the largest in the hotel and boasted an oak-paneled living room, a library, three bedrooms, a full kitchen, a maid’s room, and two butler’s pantries.

Nursing an irrational fear that Prohibition could return, Sam strived to make drinking as respectable as possible. Seagram urged consumers to drink moderately and following World War Two, made several prestigious European purchases, including both Perrier-Jouët and Mumm’s champagne, cognac maker Augier Frères, and the highly successful wine shipper Barton & Guestier. But Sam’s greatest feel was for marketing and selling whisky, and he was justly proud of his creation and launch of the company’s two premium whisky blends, Crown Royal and Chivas Regal. He acquired the Aberdeen-based Chivas Brothers for £80,000, intent on making the small, well-regarded distiller into the greatest name in blended Scotch whisky. Crown Royal, packaged in its signature purple jewelry bag, was a triumph of marketing and likely Sam’s greatest moment as a liquor executive. It commanded top dollar and for more than twenty years had no real competitors.

Despite the newfound wealth, Mr. Sam spent much of his adult life and large chunks of his fortune in a fruitless attempt to deny his past and wash away the stain of bootlegging. Driven by a near maniacal need for acceptance, he falsely claimed to have been born in Canada, affected an English accent, and became a devout Anglophile. He gave millions of dollars to both the Liberal and Conservative parties in a vain quest for one of Canada’s ceremonial senate seats. When he attempted to join such exclusive Montreal institutions as the Mount Royal Club, he was rebuffed with a potent cocktail of anti-Semitism and elitist disdain for the way the arriviste Bronfmans had made their formidable fortune. Unwelcome in society, he grew dictatorial in the world that he could control, erecting a cult of personality in which he was all things Seagram: master blender, marketing genius, infallible corporate titan. In order to avoid inheritance taxes, Sam and Allan had jointly placed their 3.3 million shares of Seagram stock into trust for their children through Seco Investments, a holding company with two parts: Cemp–for the 2.2 million shares for Sam’s children Charles, Edgar, Minda, and Phyllis–and Edper, which held the 1.1 million shares of Allan’s sons, Edward and Peter. However, Sam made sure that his majority share in Seco gave him the right to vote all of its stock and subsequently used his absolute control over his brother’s shares to bar Edward and Peter from coming to work at Seagram. Finally, in 1960, Sam announced that he wanted to buy 600,000 of Edper’s 1.1 million shares–at a discount, of course. His nephews agreed, partly out of a perceived threat that Sam would strip their father of his Seagram vice presidency if they refused. Over the next few years they earned a measure of revenge by unloading all of their Seagram shares and launching an investment and real estate empire of their own.

Tyrannical and abusive, Sam would berate employees, his favorite all-purpose sobriquet “cocksucker” applied continuously and without prejudice to salesmen, lawyers, board members, and secretaries–and even at the dinner table until his wife, Saidye, shamed him into silence. “Cocksucker,” she mused. “Isn’t that a charming word? Cock-sucker. I’m going to learn to use that.” His greatest vitriol was aimed at his younger brother, Allan, whose acquiescence to being abused only seemed to provoke him further. Sam once threw an ashtray at Allan’s head during a meeting. When Mr. Sam’s longtime attorney and advisor, Lazarus Phillips, was offered Sam’s coveted seat as Canada’s token Jewish senator by the Liberals, Sam went berserk. After three decades as the Bronfmans’ go-between, deal maker, and consigliere, Phillips found himself cut dead by Sam, who now described the man who was arguably Canada’s most sophisticated barrister and deal maker of the day as “a two-bit lawyer–I made him a millionaire.”

In front of his children he was never seen in less than a jacket and tie, even on the hottest summer Saturday. “Next to my father,” his eldest son, Edgar Sr., would later say, “Queen Victoria looked like a swinger.” Growing up in the Westmount mansion was torture for Edgar. Slaves to their father’s WASP pretensions, kept at arm’s distance by their mother, the four Bronfman children were placed under the care and tutelage of European governesses and nannies until they were old enough to go to boarding school. Contact with their parents was limited to two weekend meals for which they were required to dress, and Saturday evenings were set aside for “Life Lessons,” Mr. Sam’s lectures on how to work hard and carry oneself in the world.

Edgar loved his father, but he neither liked nor trusted him. “One thing I never saw Father do was give a compliment,” he said. He never forgot watching his father curse out Allan in the middle of an annual shareholders’ meeting or throw a glass of ice water at him during a lunch. Regarding Sam’s treatment of Lazarus Phillips, Edgar recalled, “The language Father used to describe a man whom he had often called his best friend was beyond foul,” leading him to the conclusion that “this man could turn on anyone–meaning me. Consciously or subconsciously, I lived with this all my life. The idea that I was only conditionally loved was reinforced by what I observed of Father’s conduct toward others.”

Miserable, Edgar was less than warm and considerate toward others. In a story his mother liked to tell, one of Sam’s business associates, Julius Kessler, discovered that Edgar was impressed with his pocket watch and promised to give it to Edgar as a bar mitzvah present. The boy shook his head: “You’re an old man and you might be dead by the time my bar mitzvah comes around,” he said. “You better give it to me now.”

“My father was an empire builder,” Edgar once said. “And, true to the customs of his times, the emperor needed a male heir. As the first son, I was destined to be that heir. In truth, Sam Bronfman wanted a clone.” Sadly, what Edgar didn’t want, his oldest sister, Minda, craved. Tough-minded and temperamental, she was the child most capable of standing up to their father, for she was most like him, and probably best suited to be his successor. But such a role was unimaginable for a girl–least of all any daughter of Mr. Sam. With no future in Montreal, she moved to Paris and became a baroness. Over the years, both before and after her father’s death, Minda made repeated attempts to become more active in Seagram business. Each effort was rebuffed.

Once he left home, Edgar grew ever more rebellious. At Waspy Williams College, where his main interests were drinking and chasing coeds, he briefly became engaged to an Irish girl in a bald attempt to anger his parents. A string of drunk driving accidents culminating in a motorcycle crash brought him back to Montreal. There, he saw Ben Raginsky, a psychotherapist Sam and Saidye had previously hired to explain the facts of life to Minda and Phyllis. Seemingly ready to accept that there might ultimately be more positives than negatives in being a Bronfman, Edgar completed his education at McGill and in the summer of 1951 went to work at Seagram.

While he accepted Seagram as his life, he still longed to be somewhere other than Montreal and spent as much time as possible in New York. It was there, filling in for his brother, Charles, on a date, he met Ann Loeb, daughter of the investment banker John Loeb, and the two soon decided to marry. Sam, who had repeatedly counseled his sons not to waste any time dating poor girls, was delighted with such a responsible match. The bride’s family was just as pleased: at the wedding reception, John Loeb quipped, “Now I know what it feels like to be the poor relation.”

Spending the summer of ’53 in New York, Edgar studied at the elbow of his father-in-law’s colleague Sam Steadman. A partner at Loeb, Rhoades & Co., Steadman pursued the then-unorthodox strategy of evaluating companies on their potential rather than their current asset value. Edgar returned to Montreal in the fall for a year in his father’s office before taking command of the US company. It was a role that some Seagram executives–and his own mother–believed him unsuited for.

Edgar himself was deeply ambivalent about his career at Seagram. On one hand, he harbored a grudge over having to become his father’s successor, yet he was eager to prove himself capable of running the company should his father ever let him. Still, Edgar bristled at any challengers, real or perceived. Whatever shame he felt over his father’s despicable treatment of his uncle and cousins, the notion that they should even think there was a place for them at Seagram could set him off. Like a jealous prince, he ruminated on who among his father’s aides and executives would get to stay–and who would taste the axe.

The transformation of Seagram from its opportunistic, wild-and-wooly beginnings into a respectable international corporation drove Sam in his later career. He crafted an image for the company that bore little relation to its roots. The new company motto implied a storied past: “Integrity, Craftsmanship, Tradition.” By the mid-fifties, the future of the company was in New York, not Montreal. When Seagram planned its new corporate headquarters on Park Avenue, Mr. Sam envisioned something in the moat-and-drawbridge school, but his younger daughter, Phyllis Bronfman Lambert, persuaded him to make what she characterized as a more “significant” statement. Given free rein, she hired the already legendary architects Ludwig Mies van der Rohe and Philip Johnson. Today, the Seagram building at Park Avenue and Fifty-second Street is considered one of the greatest buildings of the twentieth century. It was a triumph for Seagram and the Bronfmans–and further proof of just how much family talent Mr. Sam had overlooked when he anointed Edgar over his daughters.

When Edgar assumed the presidency of the US distiller in November 1957, he was nowhere near as involved in the day-to-day running of the company as his father had been. “I don’t much like details and I’m not really suited to being a hands-on operating executive,” he admitted. “I’m better at laying out long-term strategy.”

Sating the old man’s ego was nearly impossible, but Edgar was audacious enough to succeed occasionally. When Ann was expecting the couple’s first child, Edgar told his father that he wanted to name his first son for him. It was a startling suggestion: Sam was far from a religious man, but the gesture flaunted Jewish tradition. “My husband was well aware that in Orthodox Jewish tradition a child is not supposed to be named after a living person,” Saidye said. “He sat perfectly silent and he didn’t say a word. Later, when we went upstairs to bed, he confessed that he was very pleased but was so taken aback by what Edgar had proposed that he simply didn’t know what to say. He mulled it over and next morning, with a twinkle in his eyes, gave the children his consent.” Sam didn’t remain abashed for long: when Minda named her second child Charles Samuel, he tried unsuccessfully to have the boy’s name changed legally to Samuel Charles.

The family trust, Cemp, also gave Edgar Sr....